Keith’s Mistakes

  By Bob Shapiro

Keith Weiner is a bright guy. I Re-Post his articles to my blog regularly. He has a way of clearly getting to true relationships in economics. But even bright guys make mistakes.

One recent theme of his is trying to explain why prices rise and fall. Now this is a very complex subject, and there are multiple reasons why sometimes a given good or service costs more (or less). And, causes don’t happen all at once – there may be lags of years.

Keith likes to talk about Useless Ingredients which are mandated by federal, state, and local politicians. Keith is very right on this.

On the other hand, Keith says that the Quantity Theory of Money is bunkum. Keith argues that increasing the money supply has zero effect on prices. On this, he is very wrong, and there are many, many examples throughout history to demonstrate this.

In ancient Rome, the “money” was increased by debasing the currency. Instead of putting 100% of the stated amount on precious metal into the coins, they reduced it over many generations to less than 1%, and used the saved/shaved metal to make more coins. Prices rose continuously eventually contributing to the fall of Rome.

Hyperinflations caused by printing more and more currency has occurred in Argentina, Brazil, Venezuela, Germany, Zimbabwe, China, France, and many other countries. In the US, we’ve suffered through two hyperinflations: the “Continental” during revolutionary times, and the “Greenback” during the Civil War. These two didn’t destroy our country because Gold and Silver coins also were used as money during those times. The current Federal Reserve Note has gone through its own agonizingly slow hyperinflation, losing almost 99% of its purchasing power since the FED was created in 1913.

When Keith denies that the quantity of money is irrelevant to prices, he makes a rookie mistake. Quantity of money is not the only reason prices go up and down, but it definitely is part of the reason, as shown by looking at history.

To help deflect readers away from the quantity theory of money, Keith also misapplies basic ideas of interest rates. He says that rising rates eases the debt burden while falling rates makes debt unmanageable. If you follow the chain of events through the Economy following rate increases and cuts, Keith’s premise is not completely false.

He says that falling rates make you sell your product more quickly and cheaply (because of a falling Net Present Value), but he misses that the reason is the greater competition caused by the lower rates’ misallocation of resources. Lower rates encourage what would be uneconomic business ventures to take place. It’s the (falsely created) new competition that is killing producers and forcing prices down.

Rising rates have the opposite effect, driving out some competitors, allowing the survivors to raise prices. But, it is not the ups and downs of interest rates which encourage price fluctuations – at least not without considering the other consequences of the rate actions.

This little bit of criticism is not meant to discredit Keith. I still encourage you to read his articles and benefit from them. Everyone, including me, makes mistakes, so think about arguments presented as you read any analyst.

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